Real Estate Foreclosures

Roy Grimm, PhD

Currently, foreclosures (aka, REO’s) amount to about 3% (down from 33%) of the sales of single family homes – short-sales another 1%. REO’s now make up only 2% of the Single Family Home inventory for sale and Short-sales are zero at the moment.

They once included some of the best bargains ever seen in the Sedona real estate market, as well as some disasters. In general, though, they had tended to put a damper on prices for the entire market by providing stiff competition for the buyers’ dollars. In the last few years, however, both inventory and sales of foreclosed homes is way down, so their impact has lessened significantly. Across the state, foreclosure and mortgage delinquency rates are back to what they were at the end of 2007. At the depths of the market we used to see 28-30 REO’s on the market at any given time. Lately we’ve been averaging one or two.

In fact, there are so few of them these days that most of the REO transactions I’ve been involved with in the past couple of years have attracted multiple offers and I’ve often seen the final purchase price come in over list price. The overall ratio of Average Selling Price to Average List price is over 99% In response, the banks now seem to be pricing many of those properties notably higher and much closer to market levels than they have in the past.

Bottom line: the supply of REO’s may be decreasing and their prices rising, but they’ll still be an intriguing element of the market for some time to come.

That said, the whole distressed property market still represents some good opportunities for buyers. And, we’ve seen a few luxury homes among the REO’s. Typically, in Sedona, the pool is made up of rather modest houses. With the rental market currently being amazingly robust, we’re seeing a fair amount of investor activity in buying REO’s to fix up for rentals or simply to “flip.”

The downside for buyers is that there are some major drawbacks in the pitfalls, especially for Short-sales. More on that in a bit.

For Foreclosures/REO’s you need to be prepared to move fast. Also count on lots of competition for them. Multiple offer situations are very common for REO’s.

If you are a serious buyer, we will be happy to enroll you in an automated system that will send you listing data on Foreclosures when they hit the Sedona Multiple Listing Service. Then you can come back to me for my personal insights on ones that intrigue you. Simply email me and request that service. We’ll set it up for you quickly.

FORECLOSURES:

Referred to as REO’s (Real Estate Owned – by the bank)

When a lending institution forecloses on a property – that is takes ownership of it back from the borrower – it will first send it to a trustee sale/public auction. Surprisingly, only a small percentage of those properties are actually sold at auction – at least in Northern Arizona. That’s because the banks tend to establish the minimum auction price at the loan amount. Not too many buyers at that level because usually the home is worth less than the loan amount. So, in most cases, the banks take them back themselves. There is also anecdotal evidence that a fair number of REO’s are purchased directly from the banks behind the scenes by large investors. Hardly fair to the average investor, but apparently legal.

If you have the time, cash, and intestinal fortitude to try to purchase foreclosures at auction, let us know. We can refer you to a reputable professional who specializes in representing buyers at trustee sales. It’s a very hit and miss process and if you are successful at winning a bid, know that you have 24 hours in which to come up with the cash for the purchase and that you do not have the luxury of an inspection period to check out the property.

Be that as it may, once a property clears auction, it will come back to the MLS as a more-or-less normal listing. Certainly more normal than a short-sale. With luck, it will be listed by an ethical Sedona Realtor rather than the sometimes-less-professional, out-of-town agent. There are some horror stories about the latter.

The difference between an REO and a conventional sale is that, in addition to the standard statewide real estate contract, the lending institution will send along an addendum to the sales contract. I’ve seen them range from 5 to 18 pages long. The addenda tend to take away rights that the buyer would have according to the standard contract. For starters, the buyer will need to sign an “As Is” addendum. When the home inspection reports various parts of the house in need of repair, the bank insists that it will not make any. Actually, they occasionally do some repairs – especially things like termite remediation. But, generally, the buyers options are to either take responsibility for the repairs or just cancel the contract. Keep in mind that many of these homes have been neglected and not occupied for quite some time. So, if there has been leakage and un-attended to water damage, we’re likely to find major mold issues that might not be cost-effective to remediate. So, good (and often expensive, in the case of mold) inspections are essential.

The bank also sometimes reserves the right to cancel the contract at any point before Close of Escrow and take another offer.

As nasty as those particulars are, REO’s can be absolute steals and therefore worth the risks and hassles if there are no major problems with the property.

Again, nowadays expect to have competition. With so many buyers on the look-out for REO’s, they tend to attract multiple offers and go quickly. This phenomenon often drives the eventual selling price above the original list price. Even then they are usually well below market price.

SHORT-SALES:

A short-sale is a pre-foreclosure situation in which the lender agrees to accept a price/loan pay-off that is below the current loan amount – essentially to keep it from going to foreclosure.

We always need to verify that the lender has indeed authorized it before making an offer. Many properties are listed as short sales before the sellers have jumped through all the hoops and restrictions, only to find that they don’t qualify.

It’s possible for a buyer to snag a very good deal via a short-sale, but I have to warn you that the whole process tends to be exceedingly slow and extremely frustrating, without much assurance that you’ll actually end up with the property. Past estimates have been that 95% of short-sales never go through – although that has been changing lately. The banks are starting to ease up a bit to avoid foreclosure in some cases. The lender or servicing company will accept an offer on a property and then sit and wait to see if any better ones are coming in before giving its final approval. Until that happens there’s no contract. In many cases the lender will simply reject the offer. The national average wait-time has been three months, but that seems to be getting shorter lately. Our personal experience this year has been about six weeks.
Up to a few years ago nobody had ever heard of them in reference to real estate (they have no resemblance to stock short-sales). Now they’re getting more common. Not many at the high end of the market previously, but more of those are starting to pop up.

Basically the seller is upside down with his loan. That is, the loan amount exceeds the market value of the property. But, he still owns and often still lives in the house because the bank hasn’t foreclosed, yet.

Like REO’s, the other consideration is that the property is always sold, “AS IS” so you’re not going to get anything in the way of seller concessions or repairs. .

Some people focus on finding them exclusively, along with foreclosures, because a buyer can wind up with an excellent deal. But, that can be a mistake because many of them come with major issues – made worse by neglect. Plus, the whole process of dealing with a lender’s over-burdened bureaucracy (sometimes out-sourced overseas) that often doesn’t seem to care whether or not the transaction ever happens is frequently very frustrating for everyone involved. Lately, too, we’re seeing banks sometimes threaten to send the property to foreclosure right in the middle of the transaction – even after accepting the offer.

Or, the seller can inadvertently blow up the whole transaction by declaring bankruptcy at some during the process. In that case, the contract is canceled and the property put in the hands of the courts. All sorts of pitfalls abound, so they’re not for the faint of heart or anyone without infinite patience. Nevertheless, we have been more successful this year with them than we have in the past.

THE REST:

Beyond that, we’ve been able to get a fair number of contracts at short-sale level prices on properties where the seller is up against the wall or just highly motivated to sell. In general, the whole market, including many of the primo properties, is selling at big discounts compared with a few years ago – even with this year’s price increase. So just zeroing in on short-sales, then, doesn’t make much sense.

There are relatively few of either short-sales or foreclosures in the Sedona area compared with Phoenix or even the rest of the Verde Valley. We’ve had far fewer investors who’ve gotten in way over their heads as in other parts of the country.

Having said all of that, we do keep an eye out for them and have successful experience in working with both short-sales and foreclosures in which our clients have done quite well.